Deep Breath

By Tammy Flanagan

October 17, 2008

It's been quite a couple of weeks for newspaper headlines. Take this one from last Sunday's Washington Post: "Retirement Wreck." Or how about this one from the Wall Street Journal: "What to Down in a Down Market." (That was about the kind of whiskey you should drink to calm your anxiety.)

It seems like a time for action: Drink! Sell! Move your money!

But where?

Here's my advice on the first thing you should do: Take a deep breath.

Let's start with this message from Gregory Long, executive director of the federal government's Thrift Savings Plan. "I view this as a time for prudence, not panic," he wrote on Oct. 7. "I encourage you to think carefully before you make changes to your TSP account. Although none of us has a crystal ball to predict the future, I can assure you the TSP remains committed to doing all we can to help you maintain a sound investment strategy during this turbulent period." Being prudent means using good judgment and common sense. To do that, you have to understand the situation you're dealing with. Right now, there's panic on Wall Street, in the news media, and among those with mortgage problems and credit issues. Does that mean TSP participants should panic? No. So what is the intelligent response? The short answer is: Have a strategy. Investing isn't gambling. Since retirement will last the rest of your life, planning for it requires a long-term approach.

When do you need the money in your TSP account? If you are planning to retire at 60, you'll need your TSP funds to last 25 to 40 years. Even if you're fortunate enough not to need your TSP funds immediately when you retire -- because you have other sources of income, such as salary from a second career, federal retirement benefits, Social Security, other pensions, or investment income -- you probably want your funds to be available for your children or grandchildren. What strategy will meet these long-term goals? Buy Low, Sell High

Here's a simple principle: The best time to buy something is when prices are low. The best time to sell is when prices are high.

Now think about what you've done with your TSP. Did you recently sell your investments in stocks by moving funds from the C, S or I stock funds to the government securities G Fund? If you did, you sold when prices were low. Did you stop putting your TSP allotment from your paycheck in the C, S and I funds? If you did, then you are missing what might be a historic opportunity to buy shares at very low prices.

Shares in the C Fund were worth a little more than $10 on Oct. 10. If you invested $200 that day, you would have bought about 19 ½ shares. If you had invested $200 in the C Fund on Oct. 10, 2007, you would have bought only 11 ½ shares, since last year the price was more than $17 per share. This is a buyer's market. If you're shifting funds around at this point, consider what assumptions you're making about where the prices of stocks are heading. Do you know when they are going to go up in value? Do you know if they are as low as they will go? How will the presidential election affect the stock market? Or the holiday season, or the war in Iraq? I don't know. Unless you do, it's probably not a good idea to try to time the market.

Time Horizon

An important concept to remember in long-term investing is dollar-cost averaging. This technique involves spending a fixed-dollar amount regularly on a particular investment, no matter what the share price. This is what you are doing if you are investing in the TSP for the long haul.

Before you invest, you should think about your time horizon -- the amount of time before you need to start withdrawing funds. If you need to access all your money within a few years, you shouldn't be in high-risk investments. This is the premise behind the TSP's life-cycle (L) funds.

Notice that the L Income Fund (which was designed for those who already are using the money in their TSP accounts) has the highest percentage allocated to the G Fund. The L2040 Fund (designed for those putting away money they won't need until at least the year 2040) has the highest percentage allocated to the C, S and I funds. Those who are further away from retirement can take advantage of buying more shares at lower prices in the hope that when they cash in those shares later they will be priced higher.

So what should you be doing with your TSP now? If you were already dollar-cost averaging and diversifying according to your time horizon, then you should keep it up. If you were trying to time the market, you may need to develop a long-term investment strategy to avoid missing a stock market rebound. If you're not sure what to do, choose the L funds so your investment mix is appropriate for the time frame in which you will start making withdrawals from your TSP account.

It is unsettling to see foreclosure signs, high unemployment rates and businesses that were once considered strong now perceived as corrupt and weak. In these worrisome times, it's hard to be optimistic. But at least try to be prudent.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area. This week's topic: Help in Selecting the Medical, Dental and Vision Coverage That is Right for You, with Colleen Murphy, president and CEO of Asparity Solutions. Hosts: Bob Leins, CPA, NITP, and Tammy Flanagan, senior benefits specialist, NITP.